What is 'Budgetary Control' ? Explain any four techniques of controlling.

Answer – Budgetary control

Budgetary control compares actual results with budgets, identifies variances and takes corrective action. It is based on numerical plans, responsibility assignment, periodic comparison and coordinated action.

Advantages: focuses attention on defined targets; supports coordination across departments; promotes economy; clarifies responsibility; provides a basis for performance evaluation and corrective action.

Limitations: estimates may be inaccurate; rigid budgets may discourage necessary changes; preparation and administration take time and money; managers may focus excessively on meeting figures or deliberately set easy targets.

A budget should be realistic and reviewed when major assumptions change. Cash, sales, production and purchase budgets serve different purposes but must be consistent.

Techniques of control

Traditional techniques include personal observation, statistical reports, break-even analysis and budgetary control. Modern techniques include return on investment, ratio analysis, responsibility accounting, management audit, PERT and CPM, and management information systems.

• Personal observation gives first-hand understanding but is time-consuming and may be subjective.
• Statistical reports summarise performance through figures, averages, ratios and charts.
• Break-even analysis finds the output at which total revenue equals total cost: break-even units = fixed cost ÷ contribution per unit, where contribution = selling price − variable cost per unit.
• Return on investment relates operating profit to capital employed: ROI = EBIT ÷ capital employed × 100.
• Management audit systematically reviews managerial performance and policies to identify improvements.
• Management information systems provide timely, relevant and organised information for decisions and control.

Choose a technique according to the decision, the quality of information and the cost of monitoring.